What is a PBM?
A pharmacy benefit manager, or PBM, is a company that manages prescription drug benefits on behalf of insurance companies and other payers.
What does a PBM do?
PBMs do the following for insurers:
- Negotiate rates and rebates for medications with drug manufacturers
- Develop the drug formulary, or the list of prescription drugs covered by the health plan
- Contract directly with pharmacies to reimburse for drugs
- Process and pay prescription drug claims
- Manage drug distribution to plan members
According to The Commonwealth Fund, “By negotiating with drug manufacturers and pharmacies to control drug spending, PBMs have a significant behind-the-scenes impact in determining total drug costs for insurers, shaping patients’ access to medications, and determining how much pharmacies are paid.”
Do PBMs help contain prescription drug costs?
Generally speaking, no.
Three PBMs control the lion’s share of the market, giving them disproportionate control over the cost and accessibility of drugs in the U.S.:
- CVS Caremark — 34% of total PBM market share, by adjusted claims in 2021
- Express Scripts — 25%
- OptumRx — 21%
Unfortunately, the largest PBMs notoriously use “arcane” and “anti-competitive practices” to prevent patients from accessing the cheapest drugs, thus lining their own pockets. Such practices include:
- Placing name-brand drugs on the formulary instead of generics because they receive a larger rebate for higher-priced drugs
- Requiring pharmacies to sign contracts promising the PBM their lowest prices, which discourages pharmacies from offering lower cash prices to self-pay clients
- Keeping the difference when a patient’s prescription drug costs less than the copay to fill it, which is known as a “clawback”
- Including “gag clauses” in contracts with pharmacies that prohibit pharmacists from telling patients they could save money by paying in cash instead of using their insurance
- Charging the insurer more for a drug than they paid the pharmacy for it and keeping the profit, which is known as “spread pricing”
- Hiding their profit margins
Together, these practices lead to consumers overpaying for generic drugs — or being unable to access generic drugs — all too often.
This is bad news for individual consumers, who overpay for generic drug prescriptions by as much as 20%.
It is also bad news for taxpayers and the U.S. healthcare system because generics save the system money. According to the FDA, “Generic drugs have the same active ingredients and effects as brand-name drugs, but they can cost 30 percent to 80 percent less.”
PBMs’ profit margins have only increased over time due to a persistent lack of oversight: Between 2017 and 2019, PBMs’ gross profit increased by 12%.
Their commitment to opacity has also increased. According to a 2021 report by the PBM Accountability Project:
“Between 2019 and 2021, all three of the largest PBMs formed their own rebate aggregators or group purchasing organizations (GPOs) as consolidated contracting entities to handle rebate negotiations on behalf of themselves and other PBMs. Industry experts believe these GPO entities, Ascent, Zinc, and Emisar are an attempt to introduce an additional non-transparent layer to the pharmaceutical supply chain and will be used to extract increasing and new fees that are more difficult for customers to track and audit.”
What is a transparent PBM?
A transparent PBM is a pharmacy benefits manager that does not engage in the opaque and predatory practices listed above — clawbacks, gag clauses, spread pricing, rebate holding, etc.
Instead, transparent PBMs operate on a “pass-through” or “transparent” model, in which they pass some or all discounts and rebates they receive along to the insurer in exchange for a higher (but fixed) administrative fee. Because administrative fees, mail order fees, and data sales are transparent PBMs’ only revenue sources, they have no reason not to negotiate the lowest possible drug prices. This helps the health plan and its members predict and contain prescription drug costs.
One such transparent PBM is Sana’s partner, SmithRx, which “is working to reduce pharmacy costs by reimagining the traditional PBM as a Drug Acquisition Platform built on transparent modern technology that aligns with the needs of our customers.” Through transparency, SmithRx helps health plans and their members save up to 50% on their Rx spend.
With SmithRx and Sana, you and your employees can reap the savings. Get a quote.
Pharmacy Benefit Manager FAQs
A pharmacy benefit manager (PBM) operates in the middle of the prescription drug chain — managing aspects like developing drug formularies, processing claims, and negotiating rates and rebates on behalf of insurance companies, Medicare Part D drug plans, and other payers.
CVS owns CVS Caremark, which is one of the largest PBMs in the U.S.
Based on total adjusted claims for 2021, the three largest PBMs are CVS Caremark, Express Scripts, and OptumRx. These three PBMs control roughly 80% of the market.
PBMs make money by charging administrative fees, rebate sharing (i.e., keeping a cut of the rebate negotiated with manufacturers), spread pricing (where the PBM charges the health plan more money than they paid the pharmacy for a drug), owning retail and mail-order pharmacies, and through other direct and indirect remuneration fees.
In theory, PBMs can provide value to all parties involved in the prescription drug chain. However, the large majority of PBMs have become problematic by engaging in practices that line their own pockets rather than helping contain prescription drug costs. These practices are coming under the scrutiny of the FTC, though it remains to be seen what regulations might be proposed.